At the risk of entering an already overcrowded arena of comment, counter comment, important research and (predictably) fake news, what is the Energex take on the outlook for the likely trend in the demand for and the price of crude oil and oil products?
Unquestionably, our view of the future has changed as the first weeks of lockdown in the UK are behind us. If we optimistically wanted to believe in a “V shaped” recovery to the economy and to demand, it is now clear to us that we need to temper expectations of a quick return to normality. Indeed, what is true of the UK may be able to be parsed globally, at least throughout the developed world.
This piece is not about the detail of how and when the staged exit from the lockdown might evolve in practice but instead more about the behavioural response of the general public. We argue that behavioural psychology will trump the actions of the authorities in determining the pattern of near to medium term oil demand.
As the weeks have progressed there has been a clear shift in the psyche and perception of the public at large. This is evidenced by the overwhelming majority seen in poll figures supporting the need to continue lockdown. Arguably we are all being unknowingly brainwashed by the images fed to us by our media. By way of example, a recent picture in a national newspaper of the face of a front line NHS nurse, contorted by the effect of the emplacement of PPE equipment 10 hours a day for 6 days, showed the full horror of servicing the front line, as have the many media tours inside ICUs. Furthermore, few families are untouched by the virus whether they have relations stricken or friends succumbing to its deadly effects. The psyche change here is one where there has been a sudden realisation that this is not simply a crisis for “others” – the aged and medically challenged – but that COVID-19 is an evil lottery that takes down individuals from all walks of life, age, sex and race. It has become scary for everyone!
Of course, there is another side to the coin: the hidden stories, less visible and consequently less influencing on psyche and likely behaviour. This is illustrated by the story, emanating from a senior Addenbrooke’s Hospital official last week, that while that hospital had managed to increase available ICU beds from their usual 12 to around 65, only 14 were occupied!
The behaviour of the public will, we believe, be conditioned (rightly or wrongly) not by the hidden stories but by the images of distress and death, the bravery of the front line and the fear of the pandemic. It is unlikely that many will voluntarily want to crowd into tube trains or fly on airplanes or attend mass spectator events or linger at the pub or dine out. Certainly, for many, while the government is sponsoring their temporary employment sidelining by 80% (up to a limit), the incentive to quickly return to full time work may perhaps be muted.
We believe that while the aim of government will be to return people to work as the economy continues to suffer, it will be the people themselves who will look to the medical science perspective to determine when they believe they can safely return to full production – a vaccine or a certainty of immunity. As long as COVID-19 is newsworthy (which it will be as long as there are victims to feed the media appetite), then there will be little chance of an “out of sight out of mind” reaction that could stir up a move back to a prior norm. Voluntary social distancing is a major threat to the recovery of the economy. This is before any thought is turned to the much expected “second wave” arriving in time to further depress demand.
For oil, this will mean a muted return of demand overall. With action on the supply side, recently taken by OPEC+, being insufficient to equilibrate demand, the prospect of reaching tank tops has not gone away, but is rather postponed. Without a V shaped demand recovery, there is reason for pessimism. Indeed, this week, front month WTI has closed below $20/bbl for the first time in 18 years.
Where might there be bright spots? Indeed, gasoline can become interesting. As Spain relaxed lock down conditions this week, the roads became jammed with traffic. Of course, all were having their first taste of freedom for some time, but might there have been a sense of individuals deciding to continue social distancing voluntarily and manifesting that in one way by driving to work in their car on their own rather than commuting on public transport? So, gasoline does better than diesel. The corollary to that is that in certain developing countries gasoline consumption has visibly fallen off while diesel has remained more resilient. This is the “stay at home” factor causing electricity demand and thus diesel demand to hold up. Examples would be India or Lebanon and indeed, gasoline prices in the Med have seriously declined in the last week while diesel prices are around $40/ton higher. With limited progress in relieving the oversupply of crude oil, storage and wet freight will remain strong for longer. Indeed, filling storage to capacity is really just buying or borrowing forward demand – yet another negative to factor in. Jet remains depressed as much on the back of the success of Zoom and Teams from a business travel perspective as on the tentative runway into the resumption of tourist travel to places such as Spain, where realistically a late Summer timeframe for a phased opening of that industry is being mooted (but try finding a holiday cottage in August in the UK for let!!).
Of course, there are many other strands of argument to bring to bear, which is why so many are so willing to pontificate. These would include the perceptions that individuals and corporates begin to develop about their wealth and about “tail” risks. Will this rumination result in a retreat from credit fuelled, high leveraged activities and presage a return to the good old days of saving for a rainy day? Or does that underestimate the potential for the rapid re-emergence of commercial animal spirits as “memories are short” rules the day?
In conclusion, Energex believes that voluntary social distancing and increased fear of the “evil lottery” that is COVID-19, will result in a limpid return to full economic productivity until the public perceive the medical science case shows them a clear green light. At worst, that time could be 12 months plus away. In these circumstances, how can oil prices remain other than depressed and other than below short run marginal costs for many and cash costs for some on the producer side. In the meantime, there will be a continued depressed environment for crude oil, diesel and jet fuel prices, if (possibly) less so for gasoline. However, the fear of hitting tank tops remains, at which point there could be dramatic further falls in price without concerted action on production of a scale as yet unrealised and (probably) unrealisable. Will this all give Big Oil time to pause and prepare for the transformation of their companies to non fossil fuel supply as energy transition (another example of the imbuing of popular psyche by intense media focus) takes hold at ever improving cost relations or will a hunkering down mentality trump the carbon question?
Comments on this are for a separate discussion, coming soon!